Sunday, April 3, 2011

Investment Outlook for the Remainder of 2011

In my previous installment I played Chicken Little and warned that the US stock market was in for a rough stretch, probably starting in May and continuing through most of 2011. In an attempt to be part of the solution and not part of the problem, this installment features some ideas on where you might do well in the remainder of 2011.

Personally, I think it is a bad idea to be in US stocks for the remainder of 2011. If you’ve been in the market since January 1, you’ve done pretty darn well. It’s time to protect those gains and play defense.

Stocks

If you feel compelled to remain invested in the US stock market, it would be best to stick with two main groups of stocks: (a) commodities, energy, agriculture and raw materials; and (b) blue chip companies with ultra-strong international brands and good dividends, ideally higher up in the supply chain or with well-developed vertical channel influence.

For the first group, think about FCX (Freeport-McMoran), RIO (Rio Tinto), CLF (Cliffs Natural Resources), AA (Alcoa), CAT (Caterpillar) and POT (Potash). Inflation is bound to become an issue starting mid-year and commodities are at the top of the supply chain. Agriculture is also a good bet even though it’s a bit overbought right now. I would also use stocks to trade into gold (symbol GLD is an ETF for that purpose) or silver using the ETF symbol SLV.

For the second group, some good candidates include JNJ (Johnson and Johnson), IBM (IBM), Nike (NKE), Google (GOOG), and MSFT (Microsoft). Other than Google, those stocks pay pretty good dividends and other than Nike are not impacted by inflation.

Bonds

What about bonds? Not very good news there either. When QE2 ends this summer, there is going to be hell to pay in the short term bond market. Think of it this way – right now the Fed is competing with China and other debtors to buy Treasuries and that is holding interest rates artificially low. When that Fed-induced competition goes away at the end of QE2, watch interest rates rise. You do not want to be caught holding Dollar-based bonds of any sort when that happens, but especially not in Treasuries. One of the biggest buyers of Treasuries, PIMCO, has already announced their intention not to buy any more Treasuries for a while.

Since interest rates will rise, bonds are very dangerous territory to be in. However, international bonds should provide a safe haven of sorts. Yes, they may take a small hit due to rising rates in the US. However, it won't be nearly as bad as US bonds, and being in foreign bonds also gets you out of the US Dollar at the end of QE2. Avoiding exposure to the US Dollar is a good idea come the end of June.

A portfolio idea

My personal plan is to be invested roughly as follows for the rest of 2011. I’m in the process of allocating in this direction right now, with completion around May 1: 15% US stocks of the blue-chip variety I described earlier, 20% stocks in the commodity/agriculture/raw material area, 15% between the SLV and GLD ETF's mentioned above, 35% in international bond funds (completely out of the US Dollar with focus on emerging markets, I am using the SPDR Barclay IBND and EBND symbol ETF’s but looking to diversify on those as well) and the 15% remaining in capital preservation-type accounts. I’m actually a bit worried about having that last 15% in money markets as those rely on short term Treasuries, and I may move that last 15% into non-Dollar based bond funds.

This is one person's opinion. Who knows if I am right? As the dog days of summer come and go, check back here. I'll either be eating crow or crowing about avoiding losses and even making a few bucks.